New fee-disclosure rule burdens plan sponsors

5/14/2012

A new federal rule that requires mutual-fund companies and other plan administrators to clearly disclose their fees for employer retirement plans could spur more competition and ultimately lower costs for employers offering worker retirement plans, experts say.

The new rule, which goes into effect this summer, was set by the U.S. Department of Labor Employee Benefits Security Administration, and aims to help employers and workers better manage their 401(k) retirement plans by giving them more information about fees and other expenses they pay to maintain their account.

Richard Ohanesian, president and partner of West Hartford investment and advisory services firm Ohanesian/Lecours, said typically costs to run an employer retirement plan are buried in statements, making it difficult to determine the true expenses associated with administering a plan.

At the same time, 71 percent of Americans say they aren't even aware that they pay fees, ranging from 0.5 percent to 2 percent, to their 401(k) plan provider, according to a 2011 survey by the American Association of Retired Persons (AARP).

And while the fees may not seem like a lot, they add up over time, Ohanesian said. For example, an employee who works 35 years and contributes an estimated $5,000 per year, their 401(k) plan, with an annual return of 7 percent, would earn about $469,000, according to AARP. With an annual 1.5 percent fee, however, the employee would only earn $345,000.

Ohanesian said there are two types of fees that will be disclosed to employees including investment-management fees, which are associated with the security selection and portfolio management and administrative fees, which include accounting, record keeping and legal fees.

Ohanesian said the new disclosure rules will likely spur more competition among mutual fund companies and vendors, forcing them to reduce overhead. It will also pressure employers, usually the retirement plan sponsors, to ensure they aren't being overcharged.

Legally, employers have a fiduciary responsibility to provide the "highest level of care on behalf of their employees," Ohanesian said, which means they must manage the plan properly. That includes ensuring they are paying reasonable costs to administer the plan.

Now that fees will be more clearly disclosed, the plan sponsor will be able to better analyze the cost of services provided. That also puts more legal burden on their shoulders to make sure they aren't being ripped off. If that oversight responsibility isn't addressed, it could lead to a potential personal liability for employers, Ohanesian said.

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Bailout free

Connecticut banks are officially government bailout free.

Four years after the federal government implemented the Troubled Asset Relief Program (TARP), which provided capital to cash-strapped financial institutions at the height of the financial crisis, the last Connecticut bank holding onto those funds has repaid Uncle Sam.

As part of Massachusetts-based Berkshire Bank's recent acquisition of The Connecticut Bank & Trust Co., CBT repaid federal taxpayers the $5 million in TARP money it received in 2008, officials said.

Berkshire completed its $30 million acquisition of CBT, now "Berkshire Bank — CBT Region," in April.

According to Berkshire spokeswoman Lori Gazzillo, the bank has "completed a transaction with the U.S. Treasury to purchase and retire the preferred stock and warrant that had been previously issued to the Treasury by CBT."

The transaction marks the end of Connecticut's connection to a controversial government program that still continues to polarize the nation.

Congress approved of the $700 billion TARP program in 2008 as the financial system was on the verge of collapse to ensure that banks had enough capital to continue to lend throughout the recession.

For many, the program carried a negative connotation, placing lenders who took TARP money in a negative light.

In Connecticut, only six banks participated in the program. And they all employed varying strategies in repaying the money.

Waterbury's Webster Bank was the largest state bank to take TARP money. It repaid its $400 million bailout in a series of transactions in 2010, raising about $150 million to complete the deal.

The rest of Connecticut's TARP lenders were small community banks. And they all required help to repay Uncle Sam.

The parent of First National Bank of Litchfield, which received $10 million in TARP funds, also went the merger route, agreeing in 2009 to be acquired by Danbury's Union Savings Bank for $35 million. Union Savings Bank repaid the TARP funds as part of the deal.

The remaining Connecticut banks that took TARP — SBT Bancorp ($4 million), Salisbury Bancorp ($9 million), and BNC Financial Group ($5 million) — paid back their funds through a new government program that essentially allowed them to refinance.

The banks participated in the Treasury Department's Small Business Lending Fund program that allowed them to trade in TARP funds for cheaper capital with fewer government restrictions.

The $30 billion program aimed to spur small business lending by providing capital to qualified community banks with assets under $10 billion.

Greg Bordonaro writes the Financial Sense column every other week. Reach him at gbordonaro@HartfordBusiness.com.